Fin 221 Spring 2011 Exam 3 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. MAD Inc. is evaluating the following four independent, investment opportunities: Project A B C D Cost $300,000 150,000 200,000 400,000 IRR 14% 10% 13% 11% MAD’s target capital structure is 60 percent debt and 40 percent equity. The yield to maturity on the company’s new debt will be 10 percent. MAD’s beta is 1.7, the risk free rate is 4% and the required market return is 12%. If the company’s tax rate is 30 percent, then which of the projects will be accepted? A) Projects A, B, C, and D B) Projects A, C, and D C) Project A D) Projects A and C 2. Which of the following will decrease the WACC of any given firm that …show more content…
has incurred $8 million in R&D costs - $5 million has come from the company’s internal funds and $3 million has been covered by the EPA’s “Garbage for the Future” grant program. The project is expected to generate operating cash flows of $10, $15, $25, and $20 million in years 1 through 4. In addition to the initial outlay of $40 million required to build the plant (it will be fully depreciated and worthless by the end of the fourth year), Sandbox Inc. will need to increase its stock of NWC by $5 million at the beginning of the project and then by another $5 million at the end of year 2. Assuming a discount rate of 10%, the NPV of the project is: A) $6.63 million B) $11.63 million C) $11.48 million D) $8.21 million E) $10.76 million 13. Other things held constant, which of the following would increase the NPV of a project being considered? A) A decrease in the discount rate associated with the project. B) Making the initial investment in the first year rather than spreading it over the first three years. C) A shift from MACRS to straight-line depreciation. D) An increase in required net working capital. E) The project would decrease sales of another product line. Dr. Manesto of South Park Energy is considering replacing the company's Methane Collector Energy Plant with a Nuclear Fusion Plant. Dr. Manesto not only hopes the fusion plant will be more profitable to the firm but will earn him a Nobel Prize in science
Immediately after we are born, we start picking up sounds; the sound of our mother’s voice, the music playing in the elevator on the way to the car, and the happy cheers from a small child seeing their new sibling for the first time. We are always listening–picking up on conversations not meant for our ears, eavesdropping on the gossip of the adult world, and finding the meaning in the portentous silence. From all these auditory stimuli, we piece together the world around us to better understand what is happening to us, around us, and the secret happenings that were not for us to know. Great writers are the ones who listen and say nothing–who take it all in and save their classified information for a day when all the right words flow and form one epic story of the wondrous world we live in.
Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.
NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.
3. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment?
The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer’s filing status.
In April of 1979, a U.S. court finds the Beatle 's former manager _________ guilty of tax evasion and he is sentenced to serve two months of a two-year sentence in prison.
* Finance: To build the new plant, the company needs to invest a large amount of capital, thus it should identify whether its current finance is enough for investing or it needs to attract more money. If not, the company may choose some kind of financing such as issuing bond, borrowing money or offering IPOs.
General Foods is a large corporation organized by product lines. They are evaluating Super Project, the manufacture of a new powdered dessert. Crosby Sanberg, a financial analysis manager, must determine the value in accepting the proposal, along with J.C. Kresslin, the Corporate Controller. The Super Project will increase profit with a payback period of less than ten years. The proposed capital investment for the project is $200,000 ($80,000 for building modifications and $120,000 for machinery and equipment) and production would take place
See Table 1: Expected non-operating cash flow when the project is terminated at year 4 = 165,880$
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Question Number One (1) Value the processing plant proposal. Ignore the Industrial Revenue Bond financing. Assume: Market Risk Premium 8.8%, Riskless Rate 11.41%, and Harris Long Term Debt Rate 13.5%.
"a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what
The upgrade of the Rotterdam plant involves implementing the Japanese technology and requires a capital expenditure of £8.0 million with £3.5 million spent today, £2.0 million on year one, £1.0 million on year two and £1.0 million on year three. This will also increase polypropylene output by 7% from current levels at a rate of 2.0% per year. In addition, gross margin will improve by 0.8% per year from 11.5% to 16.0%. After auditing the financial models, it is concluded that the static net present value of the upgrade is -£6.35 million using a discount rate of 10% and an expected inflation rate of 3% annually. The Rotterdam upgrade contains an option to switch to the speculated German technology being available in five years. The current value of the option is zero as it is deeply out-of-the-money. The total net present value of the upgrade is -£6.35 million. The incremental earnings per share of the upgrade is £ 0.0013, the payback period is 14.13 years, and the internal rate of return is 18.7%.
| In Business 1.0 approach, messages are scripted by designated communication, approved by someone in authority, distributed through selected channels, and delivered without modification to a passive audience. In the 2.0 approach, customers and other stakeholders participate in, influence, and often take control of conversations in the marketplace. The audience must be active listeners in the 2.0 approach.
23. This new initiative creates a watch dog to ensure accurate information need to for mortgages, credit cards, and other financial products, and protect consumers from hidden fees, abusive terms, and deceptive practices?